Question

The following are common tests of details of balances or substantive analytical procedures for the audit of accounts receivable:

1. Select 10 customer accounts from the accounts receivable master file and trace to the aged accounts receivable listing to verify name and amount.
2. Select 10 customer accounts from the aged accounts receivable listing and trace to the accounts receivable master file for name, amount, and aging categories.
3. Obtain a list of aged accounts receivable, foot and cross-foot the list, and trace the total to the general ledger.
4. Compute accounts receivable turnover for the current year and compare to the prior year.
5. Perform alternative procedures on accounts not responding to second requests by examining subsequent cash receipts documentation and shipping reports or sales invoices.
6. Request 30 positive and 50 negative confirmations of accounts receivable.

Required

1. For each audit procedure, identify the balance-related audit objective or objectives it partially or fully satisfies.
2. In which order would the auditor perform the six procedures? Briefly justify your answer. (Please remember to explain)

Answer 1

Balance-related Audit Objective	Audit procedures
1.Accounts receivable in the aged trial balance agree with related master file amounts, the total is correctly added and agrees with the general ledger	a. Trace twenty accounts from the trial balance to the related accounts on master file. b. Foot two pages of the trial balance, and total all pages.
2.The accounts receivable in the aged trial balance exist.	Confirm accounts receivable using positive confirmations.onfirm all amounts over $5,000 and a nonstatistical sample of the remainder.
3.Existing accounts receivable are included in the aged trial balance	Trace ten accounts from the accounts receivable master file to the aged trial balance.
4.Accounts receivable in the trial balance are owned.	Review the minutes of the board of directors for any indication of pledged or factored accounts receivable.
5.Accounts receivable in the trial balance are accurately recorded.	Confirm accounts receivable using positive confirmations.confirm all amounts over $5,000 and a nonstatistical sample of the remainder.
6.Accounts receivable in the aged trial balance are properly classified.	Review the receivables listed on the aged trial balance for notes and related party receivables.
7.Transactions in the sales and collection cycle are recorded in the proper period.	Select the last 10 sales transactions from the current year’s sales journal and the first 10 from the subsequent year’s and trace each one to the related shipping documents, checking for the date of actual shipment and the correct recording.
8.Accounts in the sales and collection cycle are properly presented and disclosed	Review the minutes of the board of directors for any indication of pledged or factored accounts receivable.
9.Accounts receivable in the trial balance are stated at realizable value.	Discuss with the credit manager the like lihood of collecting older accounts. Examine subsequent cash receipts and the credit file on older accounts to evaluate whether receivables are collectible

Applying audit procedures on Accounts receivables:

Audit procedures are applied to the accounts receivables balances to test their assertions. Testing these assertions include verifying its existence, rights, and obligations, completeness, accuracy, classification, and presentation.

These assertions may be materially misstated due to fraud or error. It is the responsibility of the auditor to perform unique audit procedures for every assertion and reveal any misstatement if present.

However, the extent of applying audit procedures depends on the control systems implemented in the accounts receivables division and how efficiently are those controls practised to bring about the results.

Inherent risks in the accounts receivables balances:

There are some built-in risks the accounts receivables balances. These risks may result in misstatements due to fraud or error. There may be certain circumstances in which the accounts receivables officers may skip some balances or insert wrong postings.

These risks are more probable when there is no connection between corresponding departments involved in the accounts receivables.

In some instances, the management may intentionally increase the accounts receivables figures to give a positive signal to stakeholders, for example by reporting next or previous year’s sales in the current year.

One important and primary risk involved in the accounts receivables balances is that the organization has not expensed out the amounts of the bad debts in the receivables balances, which they acknowledge cannot be recovered anymore.

Bad debts occur when the customers do not pay according to the terms agreed with them by the supplier. These balances should, therefore, be expensed out.

1) Analytical Review:

Analytical review is not the procedure that uses to obtain audit evidence, but it is the procedure used to assess the unusual transactions or events as the principle or basic to perform other procedures.

For example, when auditor found there is unusual transactions or event as the result of using analytical review, then the auditor will use other procedures that are applicable to obtain evidence.

The analytical procedure could be used for the types of transactions or events that occur regularly or have a connection with others’ transactions or events.

2) Inquiry:

Auditors inquire accountant and related management to gather information and obtain an explanation on the mater that found by auditors.

Sometimes auditors inquire about management about the business process and the ways how financial transactions are recording as well as the major control on business transactions.

The inquiry is also one of the most important audit procedures and it could be used in different stages.The audit evidence that you found as the result of your testing after an inquiry in strongly to be used as audit evidence rather than information from inquiry itself.

3) Observation:

Observation is one of the audit procedures that auditors use to obtain an understanding and gather audit evidence mainly to the real process or the ways how clients have done some specific business process.

This kind of audit procedure is mainly to confirm the process that the client told, physical confirmation, or some time used to obtain audit evidence in order to make their own projection which will be used for comparison with the client figure.

For example, auditor joins client stock take at the year-end and observe whether the way that they count are in the correct procedures or not.

In this procedure, the audit is not confirmed whether the client counts their inventories correct or not, but it confirms whether clients counting procedure is correct or not is one thing.

Another thing is the auditor tries to confirm whether the counting has really existed.

However, in practice, sometimes the auditor is not only observed how the client counts but they also jointly perform counting inventories.sometimes auditors using observation are not only for observing in counting fixed assets or inventories but also using to test the reasonableness of revenue.

4) Inspection:

Inspection refers to verification or vouching documents. This is one of the most important and it can be 60% of audit work involve with the inspection of documents.

For example, the auditor examines the sales invoices that record in financial reports.The auditor might examine whether the invoice issued by the client is really based on the goods that receive. And the goods that received is actually the one the company makes an order.

The auditor might also examine the payment voucher against the authority that approves the payment vouchers.

The auditor might also inspect the supporting documents recording the inventory’s movement during the year. This is including the documents related to purchasing raw material.

5) Recalculation:

Recalculation is the type of audit procedure that normally done by re-performing the works performed by the client in the purpose of assessing if there any difference between the audit’s work and the client’s work.

For example, the auditor might re-perform depreciation calculation and assess if there any difference between auditor calculation and its client’s calculation.

The auditor might also perform the recalculation on monthly salary expenses that prepare by the payroll and finance department to ensure that the net salaries that paid to the employee are correct.

Recalculation is the procedure that use to confirm the accuracy of transaction that involves calculation.

audit procedures for testing accounts receivables:

• Matching opening balances of accounts receivables to last year’s closing balances.
• Applying analytical procedures to find any unusual differences and reasons behind them.
• Obtaining receivables ageing report from the client and matching the figures to accounts receivables general ledger.
• Recalculating the figures of accounts receivables general ledger to confirm the accuracy.
• Verification of invoices against the supporting documentation to verify that correct postings are carried out in the general ledger.
• Verifying the sales period by inspecting the shipment documents of those sales.
• Verifying completeness and existence by sending direct confirmations to debtors.
• Reviewing the company’s policy for allowance for doubtful debts and applying it to the receivables balances.
• Comparing general ledger balances to actual receivables listings and checking their accuracy.
• Analyze that the necessary disclosures for bad debts and other significant events are correctly presented in the notes to the financial statements.
• Applying cut off procedures to verify that amounts recorded in the current year do not relate to other periods.